– ‘Ultimate Level of Interest Rates Likely to be Higher Than Previously Anticipated’
– Fed Not Seeking ‘Enormous’ Unemployment Rise but Tight Labor Markets Must Soften
By Steven K. Beckner
(MaceNews) – Federal Reserve Chair Jerome Powell served notice Tuesday that the Fed will likely need to raise short-term interest rates higher than he and his fellow monetary policymakers once hoped because of inadequate progress toward reducing inflation to the central bank’s 2% target.
Powell, in the first of two days of testimony on the Fed’s semi-annual Monetary Policy Report to Congress, said he and his colleagues on the Fed’s policymaking Federal Open Market Committee are prepared to “increase the pace of rate hikes” if needed to make policy “sufficiently restrictive” to curb inflation.
The Fed chief told the Senate Banking Committee there is “disinflation” in goods and housing prices but said “there is little sign of disinflation thus far in the category of core services excluding housing, which accounts for more than half of core consumer expenditures.”
Powell also expressed concern about “extremely tight” labor markets and wage gains “above what is consistent with 2% percent inflation.”
He reiterated that the Fed is “strongly committed to returning inflation to our 2% goal” and said
“inflationary pressures are running higher than expected.”
Powell, who will reprise his testimony Wednesday before the House Financial Services Committee,
was speaking two weeks before the FOMC meets to reconsider its rate settings. It will also update its Summary of Economic Projections, including revised projections for the federal funds rate.
After raising the funds rate 75 basis points at four straight meetings, the FOMC slowed the pace to 50 basis points on Dec. 14 and 25 basis points on Feb. 1. That eighth move took the funds rate to a target range of 4.5% to 4.75%.
The FOMC “anticipate(d) that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.” The policy statement added, “In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
The Feb. 1 increase left the funds rate within 50 basis points of the target range which FOMC participants projected it would reach by the end of 2023 in their December 14 SEP – a median of 5.1%. But since then, worse than expected inflation data, tight labor markets and strong consumer demand have prompted various Fed officials to say the funds rate will likely need to go higher, and stay higher, than previously thought.
Powell, who was testifying roughly a year after the Fed stopped holding short-term interest rates near zero, did not disavow such sentiments, and in fact reinforced them.
“We are seeing the effects of our policy actions on demand in the most interest-sensitive sectors of the economy,” he said in prepared testimony. “It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation ….”
After noting that the FOMC had slowed the pace of rate hikes, Powell suggested that deceleration could be reversed.
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2% has a long way to go and is likely to be bumpy…,” he told the Senators. “(T)he latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated.”
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” he continued. “Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.”
Powell made much the same point in response to questions.
“Nothing in the data suggests we’re doing too much (credit tightening),” he said. “We have more to do.”
Powell was not specific about how much higher the FOMC will raise rates, but after noting that officials projected rates in the range of 5% to 5 ¼%, he said, “We’re going to write down again in March 21-22 meeting … and … I think the data we’ve seen so far — we still have significant data to see – suggest that the ultimate rate may well be higher than what we wrote down in December.”
In the same vein, he went on to say, “It’s hard to make the case we’ve over tightened. We need to continue to tighten…”
“We’re very mindful of the lags of policy,” he continued. “I don’t think we need significant increase in unemployment, but I do think there will be a softening of labor markets to get to 2% inflation.”
As usual, Powell declined to predict what the FOMC will decide on March 22, but said recent data “all point in the same direction ,… they do suggest the possibility ultimately of the need to raise rates higher than expected.”
He stipulated that “we have two or three more important data releases before the meeting” and said “very importantly we will be looking carefully at that .… That will go into the decision that we will make about what to do at the March meeting.”
Powell discouraged hopes of rate cuts in the foreseeable future: “The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”
At the same time, Powell suggested that future rate hikes could be constrained by the Fed’s knowledge that the full effects of past monetary tightening have not been felt.
“It takes time for the full effects to be seen, and we’re watching to see those effects come into play.”
Significantly, however, Powell avoided talking about downside risks to the economy or about overt tightening.
Asked if the Fed’s efforts to rein in inflation could come into conflict with its mandate to sustain “maximum employment,” he responded, “not now when we have the lowest unemployment rate in 54 years and an extremely tight labor market.”
“That time could come, but not now … we’ve very far from our inflation goal and past full employment,” he added.
Asked if the Biden administration’s energy policies were raising prices and working against the Fed’s effort to reduce inflation, Powell said the Fed is “very focused on core inflation,” which excludes energy and food.
“Core inflation has come down but not nearly as fast as we’d hoped, and it has a long way to go,” he said.
Confronted with accusations from Sen. Elizabeth Warren (D-Mass) and others that the Fed is trying to drive up unemployment to battle inflation, Powell denied the Fed is targeting increased joblessness and pointed out that unemployment is at its lowest level in 54 years at 3.4%.
“I don’t think we need to see an enormous increase in unemployment ….,” he said. “Even 4% is better than” previous cycles.
Several senators pointed out that rising interest rates are increasing the cost of financing deficit spending, but Powell made clear he regards that as a problem for Congress and the executive branch to tackle, not the Fed.
Asked if the Fed worries about rising federal funding costs, he replied, “no, we do not, and we’re not going to. That would be fiscal dominance, if we were constrained in our monetary policy by fiscal policy.”
Powell said the level of federal debt is manageable but said “the path we’re on is not sustainable.”
Asked about the looming debt limit, Powell reiterated that the only responsible course of action is for Congress to raise it.
In other comments, Powell declared that the Fed will not raise the inflation target from 2%.